Business Insights: What Are The Key SaaS Pricing Models?

Are you considering starting a SaaS business?

Did you know that half of SaaS companies never test their pricing model or undertake research to evaluate how much their target market is willing to pay?

Furthermore, many companies launch a SaaS product without knowing about SaaS pricing models that may have a high degree of relevance to their product and a proven track record of success.

This article will explain all the SaaS pricing models available, the advantages and disadvantages of each model and highlight companies that have had success using each one.

1. User-based pricing

Overview

A user-based pricing model is where a SaaS company charges business subscribers for every user accessing the service. For every additional staff member given access to the software, an extra user subscription charges to the account.

Benefits

It is a straightforward model to understand and often gives users complete access to a product meaning no further upsells to access more features. For a business customer, it is also simple to calculate the price depending on the number of users they need to add to their account.

For the provider, it is easy to manage:

1. The price is fixed so there are no nasty surprises for the customer to be unhappy about.
2. Revenue will grow as a client increases their user base, especially if they started with low pricing at the beginning.

Disadvantages

There is a risk that clients will simply share logins to reduce the subscription costs of adding more users. It, therefore, may not reflect the value of the product across your client base. It means the number of users needs to align closely with the use of the product.

Real business example: Calendly

2. Tier-based pricing

Overview

Widely used by SaaS providers, the tier-based model works where the number of permitted users increase in bands. Typically, between two and four pricing tiers are used for business customers to choose under this model. One tier, for example, might be for up to 5 users. It is similar to feature-based pricing, which we cover later on, but instead of each tier reflecting different plan features, it reflects the number of users.

Benefits

Multiple tiers allow the targeting of different customer types leading to a broader target market and increasing revenue potential.

It leads to upsell opportunities where a SaaS provider attracts clients to the lowest tier and works to move them up onto higher tier subscriptions.

Disadvantages

Tiers have the potential to be confusing to customers unless they are well defined. Every tier adds to the complexity of a decision for a customer. It is considered good practice to represent each tier with an appropriate title to help with clarity for the business customer.

Real business example: Hubspot

3. Flat-Rate Pricing

Overview

With the flat-rate pricing model, there is one package with one price regardless of how many users use the product. The client has access to all the features and agrees the number of users that will use the account at the outset. It is the simplest way to sell a product and can consist of a free initial trial.

Benefits

It is a basic SaaS pricing strategy for clients to understand and so easier to sell. Marketing efforts are also simplified as the focus is on one plan, unlike multiple pricing plans under the tiered model. It is also simple to calculate revenues with flat-rate pricing.

Disadvantages

Customers will have different opinions on whether the price represents good or poor value for money. For some, it may represent value with all features being relevant to their business. Other clients may see a single feature as being valuable to their business but cannot justify the pricing based on one feature.

For the SaaS provider, the flat-rate pricing option makes it difficult to extract the maximum value from all the clients subscribed to the service.

Real business example: Carthook

4. Usage-Based Pricing

Overview

A pricing strategy that charges customers based on their usage of a service. The more a customer uses the product, the more they are charged. A charge per action is a common way to invoice under usage-based pricing.

Benefits

It is a model where the pricing scales at the same time as the client. It can also be a useful approach to attract different types of customers with varying levels of tolerance to pricing. A sensitive user may use a product sparingly, while another business will get value out of the product with heavy use generating a lot of revenue for the SaaS provider.

Disadvantages

It can be challenging for prospective customers to calculate how much they will be paying under a usage-based pricing structure. For existing clients, it can induce a mindset, where knowing they will be charged more do not use the product as much as they might under a different pricing model.

For a provider, future revenue predictions are unclear as they have no control over a customer’s use of a product which leads to erratic revenue.

Real business example: Stripe

5. Feature-based pricing

Overview

Under this pricing model, the SaaS provider clearly defines each pricing tier with the features offered in each tier. Users, therefore, only pay for the features that they use. It is similar to tiered pricing but rather than charging for every user it charges for every feature.

Benefits

Under feature-based pricing, there is a strong incentive for customers to upgrade to the next tier to access further features. Some features may necessitate great resources to deliver. Per-feature pricing allows a SaaS company to put these features into a top-tier package.

Disadvantages

It can be challenging to get the features in each tier to match what users want. The risk is key features can either end up in overpriced tiers or conversely lie in the lowest cost pricing packages. The model can also leave resentment with some users who feel that despite paying to use a product, the provider denies some features.

Real business example: Leadpages

6. Pay per active user

Overview

Pay per active user is a pricing structure where a provider charges a business customer for every active user. It is a more advanced form of the per-user model where a customer can sign up as many users as they want. The difference here is, there is a charge only for users that were active during that cycle.

Benefits

Businesses could potentially sign up front hundreds of employees to use a SaaS service without certainty that they would all use the software yet receive an invoice for it. Per-active user eliminates this problem with only active users being charged and so no money wasted on non-active users of the software.

Disadvantages

This model is most useful for large B2B enterprise customers. Small and Medium-sized enterprises (SMB) do not see the same size of benefits of this model as companies with hundreds or thousands of staff potentially using software.

The best example of this pricing model is Slack

7. Freemium

Overview

Freemium is the provision of a free service which is supplemented by additional paid-for upgrades. The freemium pricing model usually comes as part of a tiered SaaS pricing model where paid tiers are augmented by a basic free to use tier. The model works as a lead generator where users then upgrade to a paid version of the service.

Benefits

The freemium model allows customers to experience a SaaS service very quickly and in some cases, can lead to mass adoption. Customer satisfaction comes from having free access to a SaaS product and together with a robust referral program can serve as a powerful marketing channel.

Disadvantages

The number of potential customers that upgrade from a free plan to a paid service is typically meagre. It can be the case that customers opting for the free service would have paid but opted for the free package instead. Free users also can take up customer support time without paying anything back.

A real example of this pricing strategy is Mailchimp

8. Credit-Based Pricing

Overview

Credit-based pricing is a SaaS pricing structure for products that do not require continuous usage. Credits are obtained through either one-time purchases or a subscription and then redeemed by using the SaaS service. Credit-based pricing differs from a usage-based model as the user pays upfront before using a service as opposed to afterwards.

Benefits

A SaaS company can provide customers with a way to use a service and not worry when they will be using it. The purchase of credits through subscription models offer recurring revenue for the SaaS company.

Disadvantages

Refunds are an issue with the credit-based pricing SaaS pricing model. If a user has a credit surplus or they are not using the product regularly, they are likely to ask for a refund.

A real example of this pricing strategy is Audible

Less Common Pricing Models for SaaS

There exist further pricing models that are less commonly used as part of a SaaS pricing strategies by companies.

9. Hybrid Pricing

Different SaaS pricing models can be combined to a certain extent to create a custom product pricing model. Drift is an example of a company that uses hybrid pricing.

10. Per-storage pricing

Per-storage pricing is a simplified pricing model for SaaS companies that offer cloud storage. Tiered pricing is available based on the amount of storage a customer requires with a certain amount of storage free before you have to pay. Dropbox uses a per storage pricing model.

11. Free with Ad support

Free with ad support is a model where the core product offering is free to use and funds through advertisers paying to access your customer base. Website builder, Wix is a company that uses the free with ad support SaaS model pricing.

Summary

To successfully employ a SaaS pricing model that will work with your SaaS business model is not just about identifying an appropriate model. We have provided you with an insight into SaaS models, but it will also necessitate further research, testing and ongoing evaluation on your part.